Senate Vote Gives Bailout Plan New Life

Passage Gets Boost From Tax Breaks; Back to the House

By

Greg Hitt and

Sarah Lueck

Updated Oct. 1, 2008 11:59 p.m. ET

WASHINGTON -- The Senate handily passed a controversial financial rescue package Wednesday, giving the bill its first legislative victory but adding provisions that could complicate efforts to push the $700 billion plan through the House of Representatives.

The compromise bill represented a marriage of the rescue proposal with a host of measures designed to win the support of reluctant lawmakers. Additions include an increase in bank deposit insurance limits, a suggested change to accounting rules, and a $150.5 billion package of unrelated personal and corporate tax cuts.

The additions boosted support in the Senate, which voted 74 to 25 in favor, the latest twist in the proposal's roller-coaster ride this week. Opposition came from conservatives, populists and senators facing tight races where the rescue bill is drawing criticism.

ENLARGE

Sens. Harry Reid, Christopher Dodd and Mitch McConnell make a statement to the media in Washington after the Senate approved a $700 billion financial rescue package.
EPA

Senate Majority Leader Harry Reid of Nevada said he expected the House would pass the bill, a sentiment echoed by other senators. House leaders expressed cautious optimism they could secure passage, but couldn't be definitive.

President George W. Bush has called the plan vital to secure the proper functioning of financial markets. But lawmakers and the administration have spent more than a week wrangling over the proposal amid a backlash from voters. The disagreements culminated in the unexpected rejection by the House on Monday, in defiance of congressional leaders and the White House, triggering the stock market to sink.

See a Photo Slideshow

A stockbroker looked at her screen in Frankfurt. Getty Images

Stunned by the market response, lawmakers regrouped and added new items to the bill to win votes. Senate leaders took up the bill, which had stronger support in that chamber, with the aim of putting pressure on the House. Presidential rivals Republican Sen. John McCain and Democratic Sen. Barack Obama flew back to the Capitol to cast votes in favor.

The 10-year, $150.5 billion package of tax proposals includes a measure to ease the bite of the alternative minimum tax, as well as research-and-development tax credits coveted by high-tech companies and drug makers. Its addition is designed to secure the support of Republicans, who were overwhelmingly opposed in the House. But it could irk conservative House Democrats because the measure will add to the deficit.

A Failed Bailout Vote

The bill also reaffirms the Securities and Exchange Commission's authority to suspend so-called mark-to-market accounting, an issue that gained surprising traction among lawmakers looking for less costly alternatives to the Bush plan. The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them.

Banks have complained the strict application of mark-to-market rules have forced them to write down billions worth of mortgage-related securities for which there are no buyers, intensifying the squeeze in the credit markets. (See related article)

The bill, which started out less than three pages long, now comprises more than 400 pages.

A senior House Democratic aide said he was "cautiously optimistic" but put the responsibility on Republicans to come up with more votes. A spokesman for Rep. John Boehner of Ohio, the minority leader, said: "We believe we have a better chance of passing this bill than the one on Monday, but we'll have to wait and see." The House could vote Thursday or Friday.

The core of Mr. Bush's rescue plan survives in the Senate bill. The measure authorizes Treasury to borrow $700 billion to buy up tainted mortgages, securities and other financial instruments that have weakened the financial system and frozen credit markets.

While the change to deposit insurance could bring over some opponents, allowing them to argue that the bill does more to help consumers, the tax provisions could be a sticking point. The tax package had been on a separate legislative track and appeared dead because House Democrats balked at taking it up.

Fiscally conservative Democrats, who provided a solid bloc of 25 yes votes Monday, dislike the tax package because it isn't offset by spending cuts or other tax increases, adding to the deficit. The tax items could also drive away progressive Democrats concerned the bailout bill doesn't do enough to help average Americans, congressional aides said.

The move to raise deposit insurance offered by the Federal Deposit Insurance Corp. to $250,000 from $100,000 adds billions of dollars of new liabilities to the federal government. As part of the bill, the FDIC earned expanded authority to borrow taxpayer dollars to back the higher coverage. The agency's deposit insurance fund is already at historically low levels. It now has a $30 billion line of credit with Treasury.

Through 2009, the bill would permit the FDIC to request unlimited amounts to cover losses related to the higher limits.

House Majority Leader Steny Hoyer, a moderate Democrat from Maryland, said he is urging fiscally conservative Democrats, known as Blue Dogs, to focus on the "the bigger picture" and the need to stabilize the nation's shaky economy. "My gut tells me" they will still support the bill, he said.

Rep. Jim Cooper of Tennessee, a member of the Blue Dog Coalition, voted for the bill Monday and said he will again, despite the tax additions. "I think we have to ignore the Senate irresponsibility. The $700 billion issue is more important than the $30 billion issue," Mr. Cooper said.

Mr. Cooper said he hasn't spoken with colleagues about how they will vote, but expects House Democrats to pick up 10 or 15 votes. "I think a lot of people regret their vote on Monday," he said, "but they need some cover to change their vote," such as the increase in deposit insurance.

The legislation contains a number of tax breaks that have been attacked by fiscal conservatives, including an exemption from a 39-cent excise tax for children's wooden practice arrows, an extension of credits for businesses that employ residents of Indian reservations. The $18 billion in clean-energy incentives allow businesses to provide benefits to employees who commute to work by bicycle.

Even if Democrats hold the line, Republicans will have to find extra support. The House bill failed Monday on a 228-205 vote: 140 Democrats backed it, representing 60% of the Democratic caucus; Republicans brought 65 votes to bill, about a third of the party's ranks.

More on the Bill

Apart from the Troubled Assets Relief Program, the bill before the Senate includes:

Extensions of the AMT patch, tax deductions on state and local sales taxes, tuition, teacher expenses and real property taxes and tax credits for business research and new market investors

Making it easier for film and TV companies to use deduction for domestic production

Exempting children's wooden arrows from excise tax

Income averaging for Exxon Valdez litigants for tax purposes

Party leaders in the House need 12 lawmakers to switch, assuming other votes stay the same. Mr. Hoyer is pressing Republican leaders to deliver 100 votes, half the Republican caucus.

House Minority Whip Roy Blunt (R., Mo.) and others in the Republican leadership were putting pressure on lawmakers in telephone conversations Wednesday. One focus was the Republican delegation from Texas. Despite calls from the president to his home-state lawmakers, more than a dozen Texan Republicans voted against the bill, including Rep. Joe Barton, the ranking Republican on the House Energy and Commerce Committee, and Rep. Ralph Hall, a personal friend of the president.

"After Monday, there can be no doubts, going to the floor, about where our numbers are," said one Republican leadership aide. "There can be no failure."

Republican Rep. John Shadegg of Arizona voted against the original bill, favoring instead a change to accounting rules he thinks are partly responsible for the crisis. Mr. Shadegg said he spoke with SEC Chairman Christopher Cox for more than an hour Tuesday, and said a recent SEC move to tweak the rule and the increase in deposit insurance makes the bill "significantly" better and he is "leaning" toward voting for it.

The House vote revealed deep unease among rank-and-file lawmakers. In an effort to broaden support, Senate Majority Leader Mr. Reid and his Republican counterpart Sen. Mitch McConnell of Kentucky added the provision to raise federal deposit insurance. Supporters contend the increase is needed to bolster consumer confidence in the banking system. The increased coverage would be effective through 2009, although many people expect it to be permanent.

Another provision added by the Senate would require most employers and health insurers to put mental-health on par with physical illnesses. The star-crossed legislation has been in the works for the past decade without ever reaching the president's desk.

Ahead of final passage, members of the Senate cast the 'yeas' and 'nays' from their desks, a show of ceremony that underscored the gravity of the vote, politically and economically.

"This is the kind of vote we came here to have," said Sen. McConnell, who is in a difficult fight for reelection. The shaky economy is a big issue in Kentucky, and Mr. McConnell has taken a lead role in advancing the bailout.

Republican Sen. Gordon Smith, who is also up for reelection, said businesses and local budget officials in his home state of Oregon are starting to feel the impact of the crisis. He voted for the bill. "This is one of those moments where politics has to take a back seat," he said.

Mr. Smith's challenger, Democrat Jeff Merkley, is opposed. He swiftly issued a statement Wednesday night condemning the bill. "I believe it is just wrong to spend $700 billion of taxpayer money to bailout the very Wall Street financiers who created this crisis," he said.

Some 50 trade groups -- including the International Dairy Foods Association and the National Association of Plumbing, Heating and Cooling Contractors -- signed a letter expressing disappointment with the House's rejection of the bailout package. The list of signatories includes leaders of the real-estate and banking industries, such as the National Association of Realtors, the Associated General Contractors of America and the American Banking Association.

The Democratic Governors Association and the Republican Governors Association issued a joint statement pleading with Congress to "leave partisanship at the door and pass an economic recovery package."

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